The renminbi is on a seemingly inexorable march towards becoming a global currency. It is widely used in international trade and finance transactions. Now China wants the International Monetary Fund to label the renminbi an official reserve currency by including it in the exclusive group that makes up its unit of account, the Special Drawing Rights. That group comprises the dollar, the euro, the yen and sterling.
There are good reasons to welcome the renminbi’s rise. Its trajectory is closely correlated with banking and other reforms that will make China’s economy more market friendly. These are necessary to establish a more balanced and less-risky growth path, one that is less dependent on investment, generates more employment and reduces environmental degradation. Economic reformers in China have built public support for the idea that a great economic power should be home to an important international currency.
For this to happen, the country must undertake a series of domestic reforms: it needs a better and well-regulated banking system; a broader range of financial markets, including basic currency derivatives; fewer restrictions on the flow of capital in and out of the economy; and a more flexible exchange rate.
